The fate of the mortgage interest tax credit seems to be on everyone’s mind at the moment. I get asked about it pretty much everywhere I go these days, from business meetings to media interviews – even casual discussions at holiday parties. People are afraid of this happening, though not everyone sharing their worries seems to fully grasp what losing this credit might mean beyond what it might cost them personally.
In an attempt to avoid careening off the dreaded fiscal cliff, the government is reconsidering many of the things Americans have traditionally considered sacred – this tax credit being one – and essentially putting them all on the bargaining table. From my perspective, eliminating or dramatically reducing the mortgage interest tax deduction is the exact opposite of what would be best for the economy right now. Though some view this tax credit solely as a benefit for so-called wealthy homeowners, it has become a fundamental economic benefit to homeownership for tens of millions of Americans, and is a crucial component to maintaining stability within the housing market.
How significantly changes to the mortgage interest tax deduction will affect the health of the housing market really depends on how deeply the government decides to cut. If the tax credit is eliminated entirely, the impact on the real estate market could be devastating. Right now, the “move up” market is weak, and people who benefit from the tax credit comprise a good portion of that market. Eliminating the financial benefits of the tax credit, combined with tax hikes likely to be imposed on “wealthy” families may very well drive tens of thousands of potential homebuyers out of the market completely. Without the credit, home prices at the upper end of the market will undoubtedly fall, which will have an effect on pricing throughout the housing ecosystem, depressing prices just when the market is finally beginning to recover from a multi-year downward cycle.
While I doubt we’ll see the tax credit eliminated entirely, it seems likely there will be lower caps imposed on what can be deducted, as well as more stringent limits on what properties and loans a borrower can claim interest credit against. If these changes are significant, I suspect we’ll experience some softening in the market as well as the economy as a whole. After all, a weakened housing market will contribute to adverse conditions in related markets such as construction, building materials, home appliances and the like.
So even if we don’t go over the fiscal cliff, burdening the upper middle class and high-income households in this way can only hurt the real estate market. Considering that it’s been the housing market that’s pulled the U.S. out of virtually every recession since World War II, it seems like we should be shifting our focus to stimulating it in any way we can rather than doing anything that might knock it down. Doing the latter – by way of eliminating the mortgage interest tax credit or otherwise – could very well stall economic recovery. Nobody – regardless of their socio-economic class – wants that.
Rick Sharga is the Executive Vice President of Carrington Mortgage Holdings, LLC.